A Sampling of Advisory Opinion

JAN. 8 ~ Many market watchers are betting that a cut in dividend taxes would boost the stock market. Perhaps, for a time, investors will bid up prices for dividend-paying stocks as they chase after-tax yield. But we take issue with the assumption that corporations will have an incentive to raise dividends. First, no direct incentive per se will exist for corporate boards to increase payouts. The tax break isn't proposed for the corporate level. Second, as companies boost their dividends, they are taking capital away from funding their growth. It seems logical that investors will come to expect slower growth and will reward such stocks' lower multiples.

Currently, we estimate that equity real-estate investment trusts and mortgage REITs trade, respectively, at seven times and 9.5 times 2003 earnings. For comparison's sake, the S&P 500 currently trades at 17.5 times 2003 estimated earnings... We remind investors that if the S&P 500 member companies were to increase distributions from the current 1.7% yield, these companies would probably trade at lower multiples to forward earnings because less equity would be retained to fund future growth.

JAN. 10 ~ We are almost through one of the most contentious holiday seasons we have ever experienced. Over the last few months, investors have been highly attuned to the confluence of negative factors influencing December 2002 sales: the shorter holiday selling season (26 days versus 32 days last year), an uncertain economic environment, and the threat of military action in the Middle East. The concern was warranted. Although December sales results were largely in line with expectations, it is important to keep in mind that those expectations had been ratcheted down over the last several weeks. In spite of fewer shopping days between Thanksgiving and Christmas (which ultimately resulted in lower year-over-year traffic levels) the vast majority of December sales occurred during the last two weeks of the month. Even though December is usually back-end weighted, we believe that consumers were holding out for better and better promotions as the holiday season progressed.

JAN. 10 ~ Earnings growth will be pedestrian this year, in our view. We are forcing ourselves to forecast a top-down 2003 EPS of $49 for the Standard & Poor's 500...but we are more comfortable with say, $46. Even with that forecast, the price/earnings ratio comes out at 18.5 times with an index at 900. That is considerably above the average historical P/E ratio of 15.5 times. On that basis, multiple expansion is out of the question this year...We find no comfort in the investment-led recovery story. Business spending will pick up when corporations have cash to spend. This year, we see unprecedented claims on cash flow coming from pensions, post-retirement benefits, litigation costs, etc. By March, U.S. corporations might feel that they are already running out of cash. Which option are they more likely to choose: let the debt level increase, or contain business spending?

JAN. 9 ~ The Bush plan will be particularly important to the economy because it will help the economy to reach its growth potential. When the added $100 billion of fiscal stimulus (about 1% of gross domestic product) is added to the economy's current growth rate of about 3%, the odds look good for growth of about 3.5% or more this year. Reaching the economy's growth rate is important because job growth and business investment generally begin when the economy is growing at or above its growth potential...As for whether the U.S. can afford the plan, it should be noted that a deficit of $200 billion or so would be roughly equal to 2% of GDP, or about half the levels seen in the early 1990s and below the 3% budget deficits carried by many European nations. Moreover, the debt-to-GDP ratio for the U.S. government stands at about 50%, which is below the 60% standard in Europe...On this basis, the U.S. can afford a slightly higher deficit.

-- Tony Crescenzi

The Chartist P.O. Box 758 Seal Beach, Calif. 90740

JAN. 10 ~ While we have no crystal ball, we are confident that 2003, which is a pre-election year, will not go into the record books as the fourth losing year in a row. The odds favor an up year considering the market has finished on the plus side of the ledger for the last fifteen consecutive pre-election years. The reason for this phenomenon is well-founded, in that the incumbents during a pre-election year will pull out all stops to remain in office. While we continue to advise remaining in a cautious mode, at least for the time being, we find the market's recent price action very encouraging. Overall, market breadth has been good with the daily advance/decline line recently surpassing its August/September highs. All of the key indexes have successfully held above their November lows on the recent pullback and now appear ready to make still another attempt at moving through their Aug. 22 recovery highs. As we had previously pointed out, this would be highly bullish for the market's longer-term prospects.

JAN. 16 ~ Initial unemployment claims plunged by a seasonally adjusted 32,000 in the week ended Jan. 11 to 360,000. This compared to a consensus forecast of a 395,000 outcome. We have been warning since last week's report that the seasonal factor for this week assumed a huge increase (160,000), and that a deviation from that change in unadjusted terms would skew the seasonally adjusted outcome. Indeed, in non-seasonally adjusted terms, claims increased by 97,000 in the Jan. 11 week. It is simply impossible to seasonally adjust weekly economic data in a consistently accurate manner, particularly during periods of large gyrations in the raw data...It won't be until two weeks hence that the seasonal adjustment process ceases being a dominating factor. At that point we will have a much better idea of the underlying condition of jobless claims. We expect the trend to be about 400,000, reflecting a still weak labor market. Time will tell.

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